In April of this year, I published a fairly long piece in The New York Times, arguing that Democrats should be thinking hard about how to roll out President Biden’s multi-trillion dollar Build Back Better agenda without exacerbating inflationary pressures.
I remember economics in college, I had a book by neoclassical Blinder and one by neoclassical Mankiw. Both talked of economics as a way of studying and optimizing the allocation of resources. And now twenty years later I see these same neoclassicals refusing to engage with that very question. They never want to talk about real resources. All they know is interest rates and monetary policy.
How are such demonstrably incompetent people given such prominent platforms?
Kepler has given us his Laws of Planetary Motion but these Ptolemaics INSIST the sun orbits the earth.
I have read The Deficit Myth, and I appreciate MMT's common sense approach to economic policies. The methods MMT suggests to track inflation are less clear to me. CPI and other selected data used by governments to make sense of the economy do not provide a complete picture. We can see the disconnect between government policies and the current collapse in global supply chains caused by the pandemic and exacerbated by the government payouts to individuals and businesses.
I live in Canada and work in international trade, so my perspective might not be entirely relevant for the U.S. Most of the increased demand for consumer goods was generated by households in the EU and North America. This demand led to increased freight rates (in sone routes by 300% and more) and to added vessels by the shipping lines. The factories, ports and trucking continue to be limited by COVID restrictions. As a result, the Asia and North American ports are overwhelmed with container cargo; vessels are waiting for a berth for days and weeks; empty containers are in deficit because they are used to store the goods in transit. Transit time for cargo is twice longer than a year ago; insurance claims are rejected due to Force Majeure etc.
We cannot predict all the consequences of the supply chain disruption. Some changes will be good. Still, some of the not so good ones are already clear:
The biggest businesses (Walmart, Amazon, shipping lines) grew even more powerful.
Competition decreased.
Rising costs will eventually pass to the consumers.
The latter is already happening, but there is a time lag, so data is not showing in CPI.
The assets like real estate, stocks have grown during this pandemic. To non-economists, this is the sign that fiat currency is losing its value. Why are those trends not part of evaluating inflation?
I think most of us know productivity is the best answer to keeping inflation pressure subdued. However, the US is in the midst of a multi-decade downturn in productivity. We increasingly have no good answers for increasing productivity in the areas that plague us - housing most notably.
I'd prefer we become more productive. But it's unclear the federal government knows how to do that or could ever do so in a timely fashion. The central bank has the advantage of being able to act quickly and decisively. The longer we wait to act on inflation the worse it gets for the weakest among us: those who lack labor bargaining power, don't own financial assets, live on fixed incomes, etc.
What exactly does it mean to "act on inflation"? If prices are rising because of a shortage of something (whether inputs to production or in finished products), how exactly is the central bank going to "act decisively"?
You are caught in the neoclassical-monetarist confusion that inflation is a function of the quantity of money in the economy.
The price of meat might be rising because there are too many dollars chasing too few steaks.
Or it could be for some other reason, like increasing transportation costs because of increasing fuel costs (as happened during the seventies oil shocks).
Or it could be because people were spending less on meat for a while and now they feel safer eating out and want more steaks and pork chops in restaurants.
What, exactly, is the central bank supposed to do if the rise of the price of meat, for example, is one of those four reasons?
This is the point Kelton is making about inflation. We need to think harder—and SMARTER—about inflation. You can have inflation in one sector but not in another.
What is the central bank supposed to do about that?
When you say "it's unclear the federal government knows how to do that or could ever do so", what, exactly do you mean? The federal government is the Congress, the President, the regulatory agencies, etc.
When you say "the US is in the midst of a multi-decade downturn in productivity", what exactly are you saying.
Of course we need to think harder - productivity is the answer. If its monopoly, or supply shocks, or bad regulation etc etc. HOWEVER, there is zero evidence our policy makers are capable of doing anything to aid the supply side. Quite the contrary: government is typically in the business of subsidizing demand and stifling supply.
So yes, i've thought harder and i've concluded the optimal answer isn't feasible in any reasonable time frame. If you disagree feel free to list the current policies which will boost supply nationwide in key areas like housing...
In the meantime, the weak suffer while the top 10% watch assets soar. This is the outcome MMT is happy with? Somehow, i doubt that.
There are things that can be done quickly and decisively to reduce demand and bring down inflation. If you're worried about distributional consequences the obvious answer is targeted tax hikes.
What would boost the supply of housing? How about a program to build some homes from the government?
There's a fundamental incompatibility between housing-as-investment and housing-as-necessity. One instructive analogy is food: should food be an investment (with ever rising prices a sign of "success")? Or should it be available to all, since it's a necessity?
As thrilled as I am that my home is "more valuable" (I can sell it for a higher price), I still wonder where my kid will live if he can't afford a home.
There was a federal program to build affordable housing (and to finance it), but Nixon put a moratorium on that and Reagan, after he cut taxes on the wealthy roughly in half (and, with his successor, raised payroll taxes eightfold) cut HUD's affordable housing budget 75%. Programs like section 8 and Farm Home loans are regularly underfunded. This sabotage is nothing new, either. See https://ggwash.org/view/78164/how-public-housing-was-destined-to-fail
This is something I have been trying to tell proponents of MMT to do for years. Dismissing inflation as no worry when there was no inflation was not a good idea. There needed to be a discussion of why there was no inflation, and talk about what could change that would allow inflation to occur. I think this post talks about and tries to correct what I thought was missing from the discussion.
I agree with your take on Krugman. I'm not even an economist (retired psychologist) but how somebody could read the MMT literature and say what he did, suggests that he still does not understand MMT or maybe does not want to.
Given the pandemic wild card, China's housing bubble, ports running out of storage for lack of truckers, increasing consumer demand, climate change disruptions, and an epidemic that is far from over, how can one manage an economy without MMT as a model?
Thank you for making it clear to me that the Biden administration's self-imposed limitation of not taxing income below $ 400,000 limits the action of taxes on inflation. For giving me that and ideas like that is why I just subscribed ;-)
"I’m glad to see that the White House isn’t just thinking harder about inflation but actually doing things to help ease supply-chain bottlenecks."
Please tell me this is satire or sarcasm. Do we judge on intentions or results? If the latter, then they are currently 0-6 on the border, on ending the war, on inflation, on Covid, on the supply chain and legislation. Giving more money that doesn't result in more goods and services to meet demand results in inflation accoridng to MMT. The way to stop it is to increase taxes, also accoridng to MMT. Why aren't you stating these fundamental principles instead of dancing around the issue and hoping to stay in the good graces of the ancien regime. Celebrity has gone to your head.
What is the best way to persuade more blue cities to upzone? Should the US tie sanctions to inflation rates, granting/grandfathering permissions for firms like PEMEX, Ecopetrol, Petrobras, Repsol, Total, ENI, Statoil to work in Venezuela?
I feel compelled to point out that Krugman isn't actually a Nobel laureate. What he actually got was the 'Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel', a fake prize put out by the Central Bank of Sweden, which they mostly give out to neoliberal propagandists.
I am 100% onboard with MMT and have followed your and its development for years. And I think you are its most prominent and effective advocate.
So my comment today is a meta comment about the topic of your post, which is being taken out of context and intentionally / insincerely “misunderstood” by prominent orthodox “economists”. What to do?
Take this paragraph from above — “All you really need is an “independent” central bank that is deemed “credible” by market participants, and you can sit back and relax. There’s a one-size-fits-all way to deal with any inflation problem. To dial inflation down, simply dial up the overnight interest rate. You might throw in some “forward guidance” to help shape “inflation expectations” but that’s really still about managing inflation via adjustments in the short-term interest rate.” OK, so what’s the problem?
In context with the preceding paragraph, it’s clear to me your intention in this one is to be ironic. I get it, appreciate it, and I construe it “correctly”. But what could be done with that paragraph alone and out of context? What will the literalists with little or no appreciation for irony do with it? How could it be cited and mis-used? Is this not an opportunity for your opponents in the orthodoxy to de-contextualize and potentially ridicule your words?
You are a public figure. You face a higher level and different kind of scrutiny as a result. The wide understanding and adoption of the ideas you espouse is critical to building the base of suport necessary to enact and implement them. It’s critical to concentrate your message and minimize interference.
Maybe it’s time to retain someone or some group of someones who can help you defensively structure your writing to minimize these opportunities while preserving and clarifying your voice and message? To bring a point of reference from outside your own thinking to understand and see how your casual words could be used against you and MMT?
In conclusion, thank you for this blog, best wishes, and good luck! You have my full support.
I've been thinking a lot about this article the last three days because inflation is everywhere as a topic (and this is without watching TV). Even in conversation with friends and family it's come up, one person talking about the high price of meat, another friend wondering if she should travel now or in the spring because she doesn't know if flight prices will rise too much.
The more I think about this the more I'm convinced of the value of changing framing of economic questions, which MMT economists have been steadily doing for twenty-five years. And it's easy to do. When someone complains about inflation I've begun to say, "Don't you want your house's property value to go up? That's inflation too." It's like Professor Kelton's anecdote about asking people in that Senate committee's staff who want to get rid of government debt if they want to get rid of all government bonds.
The inflation question is probably one of the easiest ways of getting people to reframe their thinking, to use a different lens, as it were.
And I've noticed whether someone is a self-described neoclassical, new classical, New Keynesian or monetarist, they are really just different phenotypes of the same equilibrium economics genotype. Genetically they are all nineteenth century equilibrium marginalists, as far as I can tell from reading their work.
And reading some of their work is useful because you learn where they are wrong and how they are wrong.
Keynes says something profound in the last chapter of his General Theory:
"Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the world."
This still applies today. The tacit assumptions of equilibrium economists are the problem.
The assumptions are wrong. If you do start looking into their models, don't be put off or intimidated by the math. If you did two semesters of calculus, you'll understand most of what's important to know. As you learn more you realize how little economics their work actually contains. When MMTers talk about real resource constraints, stock-flow consistency, and balance sheets in a monetary capitalist economy, that's real economics. What the others do, the more I learn about it, is just an equation fetish.
Tacitly they assume the government has a budget constraint. Tacitly they assume the government can run out of money. Tacitly they assume paying off all government debt will not reduce financial assets held by persons, pensions, and businesses (by eliminating government bonds). Tacitly they assume inflation is bad...unless inflation is inflating your property value. Tacitly they assume large firms will use ongoing windfalls from tax reductions to pay for investment in productive capacity or for research and development (when in fact they use windfalls for stock buybacks that inflate their share prices, which in turn inflates corporate officers' pay).
A powerful weapon against bad economics is a well-formed, succinct reframing question.
-If inflation is bad why do you want your property value to rise?
-Paying off all government "debt" is equivalent to erasing all government bonds. Why is that desirable?
-If we don't ask "how are you gonna pay for it?" when we "need" a new aircraft carrier, why do you ask that when we talk about paying for education?
By the way, that link to Mosler's argument is great. I've heard him explain this in a few different interviews and it takes a little to wrap your head around it but it makes sense. I see exactly what he means in the behavior of the businesses I work with every day.
Most families are seeing everything they need go up substantially are not going to give a rats a$$ what is making it happen . They are just gonna be pissed.
In case anyone took up the suggestion to think through Mosler's term structure of prices inflation theory, but didn't quite get it, there's this thread an Reddit at r/mmt_economics:
I remember economics in college, I had a book by neoclassical Blinder and one by neoclassical Mankiw. Both talked of economics as a way of studying and optimizing the allocation of resources. And now twenty years later I see these same neoclassicals refusing to engage with that very question. They never want to talk about real resources. All they know is interest rates and monetary policy.
How are such demonstrably incompetent people given such prominent platforms?
Kepler has given us his Laws of Planetary Motion but these Ptolemaics INSIST the sun orbits the earth.
When will these fools retire and go away?
I have read The Deficit Myth, and I appreciate MMT's common sense approach to economic policies. The methods MMT suggests to track inflation are less clear to me. CPI and other selected data used by governments to make sense of the economy do not provide a complete picture. We can see the disconnect between government policies and the current collapse in global supply chains caused by the pandemic and exacerbated by the government payouts to individuals and businesses.
I live in Canada and work in international trade, so my perspective might not be entirely relevant for the U.S. Most of the increased demand for consumer goods was generated by households in the EU and North America. This demand led to increased freight rates (in sone routes by 300% and more) and to added vessels by the shipping lines. The factories, ports and trucking continue to be limited by COVID restrictions. As a result, the Asia and North American ports are overwhelmed with container cargo; vessels are waiting for a berth for days and weeks; empty containers are in deficit because they are used to store the goods in transit. Transit time for cargo is twice longer than a year ago; insurance claims are rejected due to Force Majeure etc.
We cannot predict all the consequences of the supply chain disruption. Some changes will be good. Still, some of the not so good ones are already clear:
The biggest businesses (Walmart, Amazon, shipping lines) grew even more powerful.
Competition decreased.
Rising costs will eventually pass to the consumers.
The latter is already happening, but there is a time lag, so data is not showing in CPI.
The assets like real estate, stocks have grown during this pandemic. To non-economists, this is the sign that fiat currency is losing its value. Why are those trends not part of evaluating inflation?
I think most of us know productivity is the best answer to keeping inflation pressure subdued. However, the US is in the midst of a multi-decade downturn in productivity. We increasingly have no good answers for increasing productivity in the areas that plague us - housing most notably.
I'd prefer we become more productive. But it's unclear the federal government knows how to do that or could ever do so in a timely fashion. The central bank has the advantage of being able to act quickly and decisively. The longer we wait to act on inflation the worse it gets for the weakest among us: those who lack labor bargaining power, don't own financial assets, live on fixed incomes, etc.
What exactly does it mean to "act on inflation"? If prices are rising because of a shortage of something (whether inputs to production or in finished products), how exactly is the central bank going to "act decisively"?
You are caught in the neoclassical-monetarist confusion that inflation is a function of the quantity of money in the economy.
The price of meat might be rising because there are too many dollars chasing too few steaks.
Or it could be rising because of monopoloy (https://mattstoller.substack.com/p/economists-to-cattle-ranchers-stop)
Or it could be for some other reason, like increasing transportation costs because of increasing fuel costs (as happened during the seventies oil shocks).
Or it could be because people were spending less on meat for a while and now they feel safer eating out and want more steaks and pork chops in restaurants.
What, exactly, is the central bank supposed to do if the rise of the price of meat, for example, is one of those four reasons?
This is the point Kelton is making about inflation. We need to think harder—and SMARTER—about inflation. You can have inflation in one sector but not in another.
What is the central bank supposed to do about that?
When you say "it's unclear the federal government knows how to do that or could ever do so", what, exactly do you mean? The federal government is the Congress, the President, the regulatory agencies, etc.
When you say "the US is in the midst of a multi-decade downturn in productivity", what exactly are you saying.
Labor productivity growth has been net positive since at least 1948 (https://www.bls.gov/opub/btn/volume-6/below-trend-the-us-productivity-slowdown-since-the-great-recession.htm)
It's true the rate of growth has fallen, but labor productivity has grown every year nevertheless.
As Kelton says, we need to think HARDER about this. Repeating received wisdom will give us no understanding.
Of course we need to think harder - productivity is the answer. If its monopoly, or supply shocks, or bad regulation etc etc. HOWEVER, there is zero evidence our policy makers are capable of doing anything to aid the supply side. Quite the contrary: government is typically in the business of subsidizing demand and stifling supply.
So yes, i've thought harder and i've concluded the optimal answer isn't feasible in any reasonable time frame. If you disagree feel free to list the current policies which will boost supply nationwide in key areas like housing...
In the meantime, the weak suffer while the top 10% watch assets soar. This is the outcome MMT is happy with? Somehow, i doubt that.
There are things that can be done quickly and decisively to reduce demand and bring down inflation. If you're worried about distributional consequences the obvious answer is targeted tax hikes.
What would boost the supply of housing? How about a program to build some homes from the government?
There's a fundamental incompatibility between housing-as-investment and housing-as-necessity. One instructive analogy is food: should food be an investment (with ever rising prices a sign of "success")? Or should it be available to all, since it's a necessity?
As thrilled as I am that my home is "more valuable" (I can sell it for a higher price), I still wonder where my kid will live if he can't afford a home.
There was a federal program to build affordable housing (and to finance it), but Nixon put a moratorium on that and Reagan, after he cut taxes on the wealthy roughly in half (and, with his successor, raised payroll taxes eightfold) cut HUD's affordable housing budget 75%. Programs like section 8 and Farm Home loans are regularly underfunded. This sabotage is nothing new, either. See https://ggwash.org/view/78164/how-public-housing-was-destined-to-fail
This is something I have been trying to tell proponents of MMT to do for years. Dismissing inflation as no worry when there was no inflation was not a good idea. There needed to be a discussion of why there was no inflation, and talk about what could change that would allow inflation to occur. I think this post talks about and tries to correct what I thought was missing from the discussion.
I agree with your take on Krugman. I'm not even an economist (retired psychologist) but how somebody could read the MMT literature and say what he did, suggests that he still does not understand MMT or maybe does not want to.
Given the pandemic wild card, China's housing bubble, ports running out of storage for lack of truckers, increasing consumer demand, climate change disruptions, and an epidemic that is far from over, how can one manage an economy without MMT as a model?
Thank you for making it clear to me that the Biden administration's self-imposed limitation of not taxing income below $ 400,000 limits the action of taxes on inflation. For giving me that and ideas like that is why I just subscribed ;-)
"I’m glad to see that the White House isn’t just thinking harder about inflation but actually doing things to help ease supply-chain bottlenecks."
Please tell me this is satire or sarcasm. Do we judge on intentions or results? If the latter, then they are currently 0-6 on the border, on ending the war, on inflation, on Covid, on the supply chain and legislation. Giving more money that doesn't result in more goods and services to meet demand results in inflation accoridng to MMT. The way to stop it is to increase taxes, also accoridng to MMT. Why aren't you stating these fundamental principles instead of dancing around the issue and hoping to stay in the good graces of the ancien regime. Celebrity has gone to your head.
Well, that was a totally useful comment, Salt Lick. Good on you.
What is the best way to persuade more blue cities to upzone? Should the US tie sanctions to inflation rates, granting/grandfathering permissions for firms like PEMEX, Ecopetrol, Petrobras, Repsol, Total, ENI, Statoil to work in Venezuela?
Would you mind elaborating on this? I'm not quite sure what you mean.
I feel compelled to point out that Krugman isn't actually a Nobel laureate. What he actually got was the 'Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel', a fake prize put out by the Central Bank of Sweden, which they mostly give out to neoliberal propagandists.
I am 100% onboard with MMT and have followed your and its development for years. And I think you are its most prominent and effective advocate.
So my comment today is a meta comment about the topic of your post, which is being taken out of context and intentionally / insincerely “misunderstood” by prominent orthodox “economists”. What to do?
Take this paragraph from above — “All you really need is an “independent” central bank that is deemed “credible” by market participants, and you can sit back and relax. There’s a one-size-fits-all way to deal with any inflation problem. To dial inflation down, simply dial up the overnight interest rate. You might throw in some “forward guidance” to help shape “inflation expectations” but that’s really still about managing inflation via adjustments in the short-term interest rate.” OK, so what’s the problem?
In context with the preceding paragraph, it’s clear to me your intention in this one is to be ironic. I get it, appreciate it, and I construe it “correctly”. But what could be done with that paragraph alone and out of context? What will the literalists with little or no appreciation for irony do with it? How could it be cited and mis-used? Is this not an opportunity for your opponents in the orthodoxy to de-contextualize and potentially ridicule your words?
You are a public figure. You face a higher level and different kind of scrutiny as a result. The wide understanding and adoption of the ideas you espouse is critical to building the base of suport necessary to enact and implement them. It’s critical to concentrate your message and minimize interference.
Maybe it’s time to retain someone or some group of someones who can help you defensively structure your writing to minimize these opportunities while preserving and clarifying your voice and message? To bring a point of reference from outside your own thinking to understand and see how your casual words could be used against you and MMT?
In conclusion, thank you for this blog, best wishes, and good luck! You have my full support.
I've been thinking a lot about this article the last three days because inflation is everywhere as a topic (and this is without watching TV). Even in conversation with friends and family it's come up, one person talking about the high price of meat, another friend wondering if she should travel now or in the spring because she doesn't know if flight prices will rise too much.
The more I think about this the more I'm convinced of the value of changing framing of economic questions, which MMT economists have been steadily doing for twenty-five years. And it's easy to do. When someone complains about inflation I've begun to say, "Don't you want your house's property value to go up? That's inflation too." It's like Professor Kelton's anecdote about asking people in that Senate committee's staff who want to get rid of government debt if they want to get rid of all government bonds.
The inflation question is probably one of the easiest ways of getting people to reframe their thinking, to use a different lens, as it were.
And I've noticed whether someone is a self-described neoclassical, new classical, New Keynesian or monetarist, they are really just different phenotypes of the same equilibrium economics genotype. Genetically they are all nineteenth century equilibrium marginalists, as far as I can tell from reading their work.
And reading some of their work is useful because you learn where they are wrong and how they are wrong.
Keynes says something profound in the last chapter of his General Theory:
"Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the world."
This still applies today. The tacit assumptions of equilibrium economists are the problem.
For several years I've subscribed to the newsletter of the Penn Wharton Budget Model (https://budgetmodel.wharton.upenn.edu/) just to see what their tacit assumptions are. By the way, you can even see for yourself the Federal Reserve's model (https://www.federalreserve.gov/econres/us-models-about.htm).
The assumptions are wrong. If you do start looking into their models, don't be put off or intimidated by the math. If you did two semesters of calculus, you'll understand most of what's important to know. As you learn more you realize how little economics their work actually contains. When MMTers talk about real resource constraints, stock-flow consistency, and balance sheets in a monetary capitalist economy, that's real economics. What the others do, the more I learn about it, is just an equation fetish.
Tacitly they assume the government has a budget constraint. Tacitly they assume the government can run out of money. Tacitly they assume paying off all government debt will not reduce financial assets held by persons, pensions, and businesses (by eliminating government bonds). Tacitly they assume inflation is bad...unless inflation is inflating your property value. Tacitly they assume large firms will use ongoing windfalls from tax reductions to pay for investment in productive capacity or for research and development (when in fact they use windfalls for stock buybacks that inflate their share prices, which in turn inflates corporate officers' pay).
A powerful weapon against bad economics is a well-formed, succinct reframing question.
-If inflation is bad why do you want your property value to rise?
-Paying off all government "debt" is equivalent to erasing all government bonds. Why is that desirable?
-If we don't ask "how are you gonna pay for it?" when we "need" a new aircraft carrier, why do you ask that when we talk about paying for education?
By the way, that link to Mosler's argument is great. I've heard him explain this in a few different interviews and it takes a little to wrap your head around it but it makes sense. I see exactly what he means in the behavior of the businesses I work with every day.
Most families are seeing everything they need go up substantially are not going to give a rats a$$ what is making it happen . They are just gonna be pissed.
To non-economists, this is the sign that fiat currency is losing its value.
Huh?
No posting w/o subscription?
In case anyone took up the suggestion to think through Mosler's term structure of prices inflation theory, but didn't quite get it, there's this thread an Reddit at r/mmt_economics:
https://www.reddit.com/r/mmt_economics/comments/mo8iak/can_someone_better_explain_moslers_explanation_of/
Check it out.